Equity investments at FVOCI – IFRS 9 requires all equity investments to be measured at fair value. The default approach is for all changes in fair value to be recognised in profit or loss.
However, for equity investments that are neither held for trading nor contingent consideration recognised by an acquirer in a business combination, entities can make an irrevocable election at initial recognition to classify the instruments as at FVOCI, with all subsequent changes in fair value being recognised in other comprehensive income (OCI). This election is available for each separate investment. Equity investments at FVOCI
Under this new FVOCI category, fair value changes are recognised in OCI while dividends are recognised in profit or loss (unless they clearly represent a recovery of part of the cost of the investment). Although it might appear similar to the ‘Available-for-Sale’ category in IAS 39, it is important to note that this is a new measurement category which is different.
Entities may find the fair value through other comprehensive income (FVOCI) designation appealing as subsequent gains and losses (including any related foreign exchange gains and losses) on these instruments are recognised in other comprehensive income and not profit or loss. Dividends that represent a return on investment (as opposed to a return of investment) continue to be recognised in profit or loss. Cumulative gains and losses recognised in other comprehensive income are never subsequently reclassified (recycled) from equity to profit or loss – even on disposal of the investment – meaning there is no need to review such investments for possible impairment. Equity investments at FVOCI
Example – Equity investments classified at FVOCI
Entity X has a 31 December financial year end and pays tax at a rate of 30%. It prepares financial statements on an annual basis (it does not prepare interim financial statements). On 1 January 20X3, Entity X acquires 100 shares of List Co for CU10,000. The journal entry at 1 January 20X3 is as follows: Equity investments at FVOCI
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1 January 20×3 |
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(in €) Equity investments at FVOCI |
DR |
CR |
|
Financial asset – Equity investment at FVOCI |
10,000 |
|
|
Cash Equity investments at FVOCI |
Equity investments at FVOCI |
10,000 |
Being the purchase of 100 shares in List Co for €10,000.
On 31 December 20X3, the fair value of the 100 shares in List Co has declined to €8,000. The journal entries at 31 December 20X3 are as follows:
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31 December 20×3 |
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(in €) Equity investments at FVOCI |
DR |
CR |
|
OCI Equity investments at FVOCI |
1,000 |
|
|
Financial asset – Equity investment at FVOCI |
1,000 |
|
|
Deferred tax asset |
600 |
|
|
OCI Equity investments at FVOCI |
600 |
|
Being the change in fair value of the equity investment and its related tax effects.
Carrying values at 31 December 20X3 are:
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Carrying value |
|
|
Financial asset – Equity investment at FVOCI |
8,000 |
|
Deferred tax asset Equity investments at FVOCI |
600 |
|
Accumulated OCI Equity investments at FVOCI |
-1,400 |
On 31 March 20X4, Entity X receives a cash dividend of €500. The journal entry at 31 March 20X4 to record the dividend is as follows:
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31 March 20×4 |
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(in €) Equity investments at FVOCI |
DR |
CR |
|
Cash |
500 |
|
|
Profit or loss – Dividends from subsidiary |
500 |
|
Being the receipt of the cash dividend of €500.
On 31 December 20X4, the fair value of the 100 shares in List Co is €13,000 and Entity X decides to dispose of the entire investment. The journal entries at 31 December 20X4 are as follows (before recording the disposal):
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31 December 20×4 |
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(in €) |
DR |
CR |
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Financial asset – Equity investment at FVOCI |
5,000 |
|
|
OCI – Profit on disposal equity investment |
5,000 |
|
|
OCI – Tax on disposal equity investment |
1,500 |
|
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Deferred tax asset |
600 |
|
|
Deferred tax liability |
900 |
|
Being the change in fair value of the equity investments during the period to 31 December 20X4 and the related tax effects.
Carrying values at 31 December 20X4 before recording the disposal are:
|
Carrying value |
|
|
Financial asset – Equity investment at FVOCI |
13,000 |
|
Deferred tax liability |
-900 |
|
Accumulated OCI |
2,100 |
The journal entry for the disposal is:
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31 December 20×4 |
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(in €) |
DR |
CR |
|
Cash Equity investments at FVOCI |
13,000 |
|
|
Financial asset – Equity investment at FVOCI |
13,000 |
|
|
Deferred tax liability |
900 |
|
|
Tax payable Equity investments at FVOCI |
900 |
|
Being disposal of the equity investment and the related tax effects.
The following table sets out the carrying values at 31 December 20X4 after disposal:
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Carrying value |
|
|
Cash Equity investments at FVOCI |
13,000 |
|
Financial asset – Equity investment at FVOCI |
– |
|
Deferred tax liability |
-900 |
|
Accumulated OCI Equity investments at FVOCI |
2,100 |
Note: On disposal, the cumulative changes in fair value remains in OCI. Entities can transfer the cumulative OCI balance to another reserve within equity, such as retained earnings.
Equity investments at FVOCI
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